Bond Yield Measures

In: Business and Management

Submitted By zimexy
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TERMS USED IN MEASURES OF YIELD

In order to be able to exhaust the measures of yield, the following terms will be of great essence in helping maximum elaboration of the measures.

Coupon: The interest payment sent to the owner of an individual bond, usually twice a year. The coupon rate is the interest rate the issuer promises to pay to the investor. For fixed-income investments, this rate is fixed at the time a bond is issued and doesn't change. Market interest rates: The prevailing interest rates in the bond markets on any particular day. These rates change based on the economy, policies and other factors. There is no single market interest rate. The rates will vary based on the time to maturity for a particular bond, the credit quality of the issuer and other factors.

Market price: The current value of an existing bond if you wanted to sell. This is the price you'd see on your quarterly statements. Market prices can be above (or at a premium to) the par value, or below (at a discount to) the par value, depending on current market interest rates, the promised coupon rate and other conditions.

Maturity: The date that a bond's par (face) value is repaid and interest payments stop. The longer the time to maturity, generally, the higher the interest rate will be—but the higher the risk of a bond's price falling, as well, if market interest rates increase. As time passes and the maturity date approaches, the impact of interest rates declines. The price of a bond, if trading at a discount or premium, will move back toward par the closer the maturity date.

Par: Also known as "face value," par is the amount an investor originally paid for a bond (assuming it was bought new) that will be returned to the investor when the bond matures. The market price of a bond can change after it's issued, for the reasons we've discussed, but the par value never…...

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